Westpac New Zealand economists have revised their inflation forecasts and now expect annual inflation to hit a three-year high in the December 2026 quarter, driven by “sharply higher” global fuel prices and a tumble in the NZ dollar.
Annual inflation, as measured by Statistics NZ’s Consumers Price Index (CPI), increased to 4.1% in the June quarter. It's the highest annual inflation rate NZ has seen since hitting 4.7% in December 2023.
Westpac NZ still estimates consumer prices rose 0.7% in the September quarter, with September quarter CPI due to be released on October 22. This would bring annual inflation to 3.7% in the year to September, down from 4.1% in the year to June.
“However, that easing in inflation appears set to be only a temporary reprieve. We now expect consumer prices to rise 1.1% in the December quarter,” Westpac NZ chief economist Kelly Eckhold said.
That would see annual inflation rising to a three-year high of 4.2% by the end of this year.
“The main driver of this revision are sharply higher global fuel prices, compounded by a more than 4% fall in the New Zealand dollar since the start of September. Together, those developments have already pushed local petrol prices up around 50 cents/litre over the past month, with the nationwide average price of 91 unleaded reaching a record $3.53/litre earlier this week,” Eckhold said.
He went on to describe NZ’s inflationary environment as “all gas, no brakes.”
The Reserve Bank’s (RBNZ) most recent projections for December quarter inflation are higher than Westpac NZ’s updated forecast. The RBNZ lowered its annual CPI expectations for both the September and December quarters to 3.9% in its September Monetary Policy Statement (MPS), down from earlier projections of 4.3% and 4.1% in its May MPS.
Eckhold said RBNZ Governor Anna Breman noted in a recent presentation while visiting Dunedin that the rise in oil prices meant risks to the RBNZ’s near-term inflation forecast were to the upside.
“However, she also noted that the RBNZ’s focus was on the medium-term outlook. We haven’t changed our quarterly inflation forecasts for 2027 at this stage. However, the upward revision to our forecast for the December quarter means annual inflation is set to remain firm through most of 2027, consistent with the RBNZ’s forecasts,” he said.
Eckhold said Westpac NZ’s inflation figures will be confirmed next week when Statistics NZ’s final monthly prices update for the September quarter is released on October 16.
Previous flat house price forecasts now look ‘too optimistic’
Westpac NZ had expected the housing market to stabilise through the second half of 2026, but Eckhold said recent trends had been disappointing, with house sales volumes continuing to weaken and the median number of days required to sell a house lengthening to 48 days.
“Not surprisingly, therefore, average house prices have continued to nudge lower despite more robust conditions in those areas – mostly in the South Island – that are most exposed to the well-performing export sector. The latest indicators suggest no imminent change in this trend,” Eckhold said.
“Given these weak trends, our previous forecast for essentially flat house prices through the September and December quarters now looks too optimistic. We have revised down our house price forecast for the 2026 year from a rise of 0.6% year-on-year to a fall of 1.4% year-on-year on a national basis.”
According to Eckhold, this is consistent with quarterly falls in house prices of 0.5% and 0.8% respectively over the September and December quarters.
“The still weak labour market, higher mortgage rates and still moderate employment growth all point to a weak housing market for the foreseeable future. Risks remain tilted towards another weak year in 2027. This would especially be the case if increased taxation of capital gains on investor housing were to occur as a result of the outcome of the 2026 general election,” he said.
A lot of water under the bridge to go
Westpac NZ’s Official Cash Rate (OCR) forecasts currently remain unchanged. The bank still thinks the RBNZ won’t raise the OCR in its October 28 review, but will hike it to 3% when it releases its December Monetary Policy Statement on December 9.
The OCR is currently at 2.75%.
Eckhold said Westpac NZ has expected the central bank to moderate the rate of OCR hikes since its July increase because the RBNZ’s estimated 3% neutral level, where the level is neither stimulatory or contractionary, is coming into view.
The RBNZ is charged with keeping inflation within a 1% to 3% range – specifically targeting 2% – and uses the OCR to try and keep inflation low and stable. The Reserve Bank’s Monetary Policy Committee (MPC) reviews the OCR 8 times a year, based on how the economy is tracking.
“We continue to think it most likely that the RBNZ will have more work to do in 2027. However, there is a lot of water to go under the bridge before then,” Eckhold said.
“The OCR increases that have occurred to date, and the one further expected increase in December, will position the MPC well to respond to conditions in 2027 as they unfold. The unexpected rise in long-term interest rates that has occurred in the last six weeks or so has tightened monetary conditions and has at least offset the easing in conditions coming from the weaker exchange rate over the same period.”
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